International Trade
As natural resources are unevenly distributed in different countries, a country cannot produce everything it needs. Some countries are good at producing dairy product; some are specialized in iron and steel industries. Sometimes, a country does not have enough of a particular item to meet its needs. For example, if a country is a major producer of sugar, it has to import some sugar when it consumes more than it can produce at home. As a result, country will buy what it needs from countries that are good at producing them and in return will sell its products to countries that require them. This buying and selling of goods is one obvious reason for international trade and is participated in by different parties.
International trade in high-tech products and services is also rapidly growing in size. The World Trade Organization (WTO) has recently begun efforts to provide information on high-tech products or services trade and its importance relative to trade in merchandise.
Even if a nation doesn’t lack the natural of technological resources and can produce a commodity at home, foreign trade may be advantageous. When one nation produces less of a commodity than another nation at the same cost, it should import that commodity rather than produce it domestically. According to the nineteenth-century economist David Ricardo, foreign trade is mutually beneficial, even when one nation is absolutely more efficient in the production of every commodity, as lone as there are differences in the relative costs of producing the various goods in the two potential trading nations. Thus, the theory of comparative advantage is closely tied to the concept of opportunity costs. If one nation is more efficient than another in producing both wheat and computers, trade is profitable as long as the relative costs of the two goods are different in the two countries.
Absolute advantage is the ability to produce a commodity using fewer resources, that is, with greater productivity. Comparative advantage is the ability to produce a commodity at a lower opportunity cost, that is, more efficiently. Comparative advantage determines which country can most efficiently produce a particular commodity. Because every use of resources involves an opportunity cost, no country can have a comparative advantage in producing all goods, but every country has a comparative advantage in at least one commodity. If countries specialize in producing goods for which they have a comparative advantage and then engage in trade, total worldwide production can be increased, meaning that it is possible for all nations to gain from trade. Such is the classical economic theory of international trade. (429 words)